Households in India have resorted to savings and invested the money in financial instruments over the past three months due to the COVID-19 induced lockdown since March, as per a report by financial services firm UBS.
The analysis indicates that forced savings in the formal sector could be witnessing an increase due to income continuity, while a major portion of labour employed in the informal sector would be seeing higher precautionary savings through reduced consumption despite stagnant / decreased income.
The report is co-authored by Edward Teather, the UBS executive director & senior economist along with Tanvee Gupta Jain and Gautam Chhaochharia.
If the situation comes back to normal and the consumer sentiment improves, those savings should be spent and can help in quick revival of growth, UBS says. However, if the disruptions were to continue for longer, they would reflect adversely on the household balance sheet.
The personal disposable income (PDI) growth of Indian households had already been hit due to unfavourable job creation trends and due to automation before the pandemic struck, the report notes.
The temporary rise in savings as a result of the significant slowdown in spending will help push India's current account balance towards surplus and also increase resources available to fund the elevated fiscal deficit in the short-term, Teather said, adding that for sustainable growth however, the government needs to focus on continued structural reforms that can help promote job creation and thereby income levels in the economy to support higher investments.
India's gross savings fell to 29% of GDP in FY20 from 34.6% of GDP in FY12, as per UBSâ€™ estimates. Studying the breakdown of India's gross savings into public, private corporate and household since FY12, household savings, which accounts for 60% of gross savings as of FY19, has seen the biggest fall, falling from 24% of GDP in FY12 to 18% of GDP in FY19, the report says.
The report states that households contribute nearly 53% to bank deposits outstanding. However, deposits in banks have risen up to 11% year-on-year (YoY) as of June 2020 compared to 7.9% YoY average registered in FY20.
UBS believes that India being a largely consumption-driven economy will need consumers to drive the economic growth and it sees only a gradual recovery going into FY22.
â€śWe estimate the investment cycle to be pushed out further on the weak demand outlook. The credit impulse will likely remain weak as the financial institutions (banks and NBFCs) are worried about potential asset quality concerns. The exports will likely continue to be a drag on the weak global economy,â€ť UBS said.